Inequality and Occupy Wall Street 7: tax policy for occupiers

December 1, 2011

Perhaps a bit more politely than others in the mainstream media, but nonetheless pretty emphatically, the Ottawa Citizen columnist Joanne Chianello tells Occupiers that it’s time to leave, and she offers some advice:

“I don’t know what the answer is to the growing income gap. Unfortunately, neither do the people at Occupy Ottawa or Occupy Toronto or Occupy Vancouver. They could have contacted a lefty economist (yes, they exist) to help frame specific policy issues or demands, but they didn’t. Perhaps that’s the protest’s “stage two” we keep hearing about.”

Contact a lefty economist!

Well, if economists are going to be at the centre of “stage two” why don’t we forget about “lefty” or “righty”, and just consult the “best”?

My previous post offered some basic principles to guide tax policy for Occupiers, and pointed out that one thing they don’t want to do is adopt the kinds of policies currently being voiced by some politicians: exempting particular things like heating expenses, or even food, from value-added taxes (like the Canadian GST/HST).

I took this recommendation from a far-reaching article called “Rethinking Tax-Transfer Policy for 21st Century Canada“. The author, Robin Boadway, who teaches at Queen’s University, has been in the public finance business for a long time. After his graduation from the Royal Military College in Kingston, and after a Rhodes Scholarship at Oxford, he completed a PhD (at Queen’s) and immediately shot to the top of the economics profession with a series of top-notch publications that began in the early 1970s, and haven’t stopped since.

I don’t know if he would describe himself as “lefty” or “righty” but without exaggeration he is the dean of public finance in Canada, and his article is inspired—at least in part—by major “rethinkings” of the UK, American, and Australian tax systems by a series of noted experts. Boadway’s carefully written and nuanced article is a blueprint for reforms to the Canadian system.

Occupiers could do no better than to use it as a starting point.

So here is a five step plan for them, and others interested in tax policies that promote equity.

(In putting them forward I have also drawn from the work of other top economists: recent US-based research by Peter Diamond and Emmanuel Saez, and an opinion piece by Kenneth Arrow. But the major source is Boadway’s article. Incidental commentary, and certainly any misinterpretations of Boadway’s major suggestions, are mine. One caution: some, but not all, of this is Canada-specific.)

1. Broaden and raise the minimal income received by the least well off. Do this in a way that promotes work incentives by significantly raising the Working Income Tax Benefit (which is a top-up to the earnings of the working poor). But do it also by expanding refundable tax benefits received by those not fully able to participate in the labour force. In effect, set a minimum guaranteed income for the least advantaged and structure it in a way that removes the huge disincentives to work and red-tape embodied in many provincial welfare schemes.

2. Increase taxes on the most advantaged. There are two ways of doing this: do both. The first, and most obvious, is to introduce a higher tax bracket for top earners. The potential downside of this is that a higher tax rate on the income earned above some very high threshold may lead top earners to work less, or even encourage a brain drain. This is likely not to be that important. As I described in a previous post, top earners in Canada owe their high incomes to a spillover from the US during the 1990s. This downside is not as great because of the economic downturn, and particularly if it turns out that top tax rates are raised in that country. The second thing to do is re-introduce an inheritance tax to apply above some suitably defined minimum amount. This would promote both equity and equality of opportunity. If you don’t tax inheritances, then tax all capital income, maybe at a lower rate than earnings, but include it all in the tax base. This involves taxing the capital gains from selling the principal residence, again only above some threshold: for good measure call this an “occupancy tax” as a legacy of your movement.

3. For tax purposes permit individuals to average their earnings over a period of several years so that one year of very high or very low-income does not have important tax implications. A scheme of averaging will focus the tax system on overall life-time income, rather than on annual income that could fluctuate significantly from year to year. For example, long tenure workers laid off from high paying jobs rarely see their earnings rebound. If their life-time earnings fall then the taxes paid in previous years could be rebated. Similarly, some hit the jackpot after years of struggling in low-income, so their tax bill should be adjusted accordingly. There is more volatility in incomes in the globalized economy, and the tax system should recognize this.

4. Heavily tax “rents” in the business sector, and in particular in the natural resources sector. A “rent” is a return that is pure gravy: a windfall that is beyond the costs needed to bring a resource or service to market. Taxing these pure rents has no impact on the incentives determining how resources are used, and does not therefore influence market outcomes. Our tax system, Boadway says, “does a relatively poor job of taxing rents, which is a serious drawback in an economy that relies heavily on primary industries.”

5. Follow the Norwegian example and save a heck of a lot more revenues from resource taxes for the young and for future generations. These are non-renewable resources that the current generation should not be spending on its own consumption. Let a huge fund develop and invest it in foreign assets so that you are selling Canadian dollars on international markets, thereby preventing the appreciation of the currency that has had a negative impact on other industries and jobs.

To some degree this five point plan is about including all sources of income in the tax base, and about targeting tax rate increases where they cause the least pain. It is also about minimizing changes in market determined outcomes.

These are basic principles that Occupiers should follow in putting forward their “stage two” proposals; but if they are somewhat uncomfortable about not having a “lefty” as spokesperson, then they should simply remember the wise words of Horton the Elephant, which, slightly paraphrased, remind us that “a dollar’s a dollar, no matter how large.”

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I like #3 a lot. Anyone who knows anything about risk management will tell you that all else being equal you’ll take a return with a lower variance as opposed to a return with a higher variance. But despite the fact that lower variance is preferred, it receives a superior average tax rate – even before adjusting for risk. This is unfair and skews the earning incentive away from risk taking, which must have some degree of negative impact on entrepreneurship.

Income splitting would be worthwhile as well. Two married couples with equal combined incomes should not be taxed at different rates because one couple has more equality between partners than another. Besides, in the event of divorce a couple is treated as a combined income anyway.

I agree with most of this, particularly point 1. I think we need a negative income tax scheme or a guaranteed minimum income to set a floor standard of living that nobody falls below, and that does not disappear the moment someone takes a low-paying job.

I am a bit sceptical about point 4. What about someone who takes a huge risk, say in some mining venture, and it pays off big time, although it could easily have gone the other way. Are we going to penalize that person? How will we determine what is a “rent” and what is payoff for entrepreneurship?

That said, I think we need to think less about how to maximize output and more about how to maximize fairness. We do not need to produce any more goods than we do right now. We should be thinking about how to use further productivity increases to give us more leisure, cut environmental damage, and improve the lives of the poorest. The incentives provided by our tax and benefits system could be structured to do this.

To go ever so slightly off topic, I don’t think Occupy in Canada have any influential economists (or more broadly, policy experts) to go to.

It seems Canada has no superstar economists to bypass the parties and put out new ideas through the media, as is the case in the US with Krugman, Roubini, DeLong, and the like…

To point out an important variable that doesn’t get noticed very often in discussions of how policy change is affected: incentives to bring new ideas in. And no, this isn’t about left versus right, it’s about a lack of policy discussion in popular forums (TVO’s “The Agenda,” is an exception, but it’s certainly not watched by the general public). I’d be curious to find out who would take up cause of this tax overhaul if Occupy does manage to appropriate the message. How exactly would our media handle this?

I would only hope that policy debate takes place within political parties themselves, since most of what comes out in op-eds and on TV networks is commentary on politics, not policy. Notice how ‘experts’ discussing policy are typically political journalists, pollsters, or political strategists. Yes, Chantal Hebert, Jeffrey Simpson, Andrew Coyne, etc, may be articulate and astute observers of policy, but their background and work is not concerned with policy research in any effective capacity. Hence, a lot of what we get is second hand stuff.

I wonder what it would take for either the Liberals (unlikely, it seems) or the NDP (not well into 2012 at least, and even then, depending on who wins the nomination) to take ownership of this tax framework.

Wouldn’t any prominent Canadian party be extremely reluctant to embrace item 1 because we all know how cynical Canadians are about welfare and disability recipients? Is there anyone who seems to have good ideas about how to package, present and market item 1 so that it will actually appeal to voters?

I really am not in a position to comment on the politics of implementation, but you should be aware that this sort of thing is part of the US landscape and the Minister of Finance has introduced a very limited version through the Working Income Tax Benefit. Also some of our other income support programs, like the Employment Insurance program, have similar elements.

In this sense it seems to be part of our political landscape as well.

I know that Senator Hugh Segal is a strong advocate of a guaranteed annual income, though I am not certain he has thought about linking it to work. In addition there is some discussion of these issues in recommendations made by the report on poverty and homelessness released by the Senate about a year or two ago.

There is also an ongoing task force in Ontario on reforms to the welfare system, but I don’t know if it has released its report yet or not.

Economics for public policy

This blog is about economics that matters:
for public policy; for Canadians; and for others.

My name is Miles Corak. I am a professor at the University of Ottawa trained in labour economics, and working on child rights, poverty, immigration, social and economic mobility, unemployment, and social policy.

My blog is intended for an audience of engaged citizens who have a curiosity about economics and how it can inform public policy.

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